2023-06-23 12:41:37 ET
Summary
- Skillz is experiencing a decline in revenue growth rates, primarily due to the underperformance of its top games, leading to a loss of user engagement.
- Paying monthly active users have dropped by 60% year-over-year, indicating a significant decline that suggests structural problems within the platform.
- Skillz aims to achieve positive adjusted EBITDA by the end of 2024, but concerns about its financial position persist, especially considering its estimated cash burn of $80 million this year.
- Skillz's decision to change its auditing firm and undergo a reverse stock split raises doubts about the company's underlying business and its ability to attract investors.
Rapid Recap
Two months ago I wrote an analysis on Skillz (SKLZ) titled, "Time, The Enemy Of The Mediocre." In that analysis, I made the case that Skillz was running out of time.
I went on to note that numerous C-suite executives were dumping their holdings in the company.
Next, I proceeded to stress that according to my estimates Skillz is set to pay at least $25 million per year in interest payments.
Accordingly, here I continue with these same assertions, that Skillz is running out of time.
Revenue Growth Rates Are Moving in the Wrong Direction
The graphic above speaks for itself. There's something structurally wrong with Skillz. There's no need to overcomplicate what is straightforward and easy to understand. The business' underlying proposition has eroded.
More specifically, Skillz made the bulk of its revenues from a few top names, namely, Solitaire Cube and 21 Blitz, and these games are no longer delivering accelerating revenues.
In fact, quite the opposite, its users have moved to other games, and this has translated into Skillz's revenues falling.
Furthermore, if you've read my work before you'll have read me say that the best insight into the vitality of a business is its customer adoption curve.
What you see above, is that Skillz's paying monthly active users are down 60% y/y. The level of this decline is not due to some mild volatility. There's a structure problem with the platform and these paying users will not return.
What's more, wasn't the whole idea behind Skillz's heavy use of marketing spend via incentives, that it would acquire users and that these users would remain loyal on the platform? As you can see above, that's evidently not happening.
And talking of spending, let's discuss Skillz's underlying cash flows.
2024 Will See Skillz Reach Positive EBITDA
Before we go much further, allow me to highlight a quote from Skillz earnings call,
As we thoughtfully consider each and every investment with the goal of adjusted EBITDA positive by the end of 2024
Simply put, Skillz's CEO Andrew Paradise states that Skillz can improve its prospects and reach an adjusted EBITDA positive by the end of 2024. But will Skillz run out of money first?
Before I answer this question, allow me to highlight the following. Ernst & Young LLP is a Big 4 auditor. After raising a critical issue with the audit, with how Skillz's revenues are recognized, or more specifically, how user incentives end up being accounted for as a sales and marketing expense, Skillz decided that now is the best time for it to change its auditing firm .
Skillz has now changed to Grant Thornton LLP. And in my opinion, a publicly listed company simply doesn't change from a Big 4 auditing firm unless something is seriously wrong with the underlying business. For their part, Skillz asserts that the auditor had no qualifier in their report.
Next, since the quarter ended, Skillz repurchased approximately $185 million worth of convertible stock. This means that its balance sheet now holds about $250 million of net cash.
As I stated higher up, in my previous analysis I estimated that Skillz's interest payment on its debt would be about $25 million this year.
Furthermore, I estimate that this year, Skillz's underlying business will burn through about $80 million in free cash flow. And on top of this figure, Skillz has accrued interest on its balance sheet too.
So, my big question is this, will Skillz run out of cash? Or will Skillz succeed in diluting shareholders and raise much-needed capital?
Skillz's 20 For 1 Reverse Stock Split
Yesterday Skillz announced that it was undergoing a reverse stock split. This means that each share will be valued at about $10 per share.
I believe that the idea behind this move is to entice potential investors to buy up its stock, since few investors would be interested in buying into a penny stock company.
The Bottom Line
Unfortunately, recent revenue growth rates for Skillz are heading in the wrong direction.
The decline in user engagement and revenues from their top games, Solitaire Cube and 21 Blitz, is a clear sign of underlying issues.
Paying monthly active users have dropped by 60% y/y, indicating a structural problem that won't easily be reversed.
Despite CEO Andrew Paradise's optimism about reaching positive adjusted EBITDA by the end of 2024, concerns about Skillz's financial position persist.
Skillz changing auditing firms and engaging in a reverse stock split raise further doubts.
With an estimated cash burn of $80 million and interest payment obligations, the question remains: will Skillz run out of cash or manage to secure additional capital through dilution? The reverse stock split aims to attract new investors, given the unappealing nature of a penny stock company.
For further details see:
Skillz: Racing The Clock As Revenue Growth Declines